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Chapter 16 Pricing Concepts and Strategies.docx

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Tauri Caputo

Chapter 16 – Pricing Concepts and Strategies Pricing Objectives and the Marketing Mix 1. Profitability Objectives  Marketers at firms must set prices with profits in mind.  For customers to pay the set price, they must be convinced they are receiving fait value for their money.  Marketers must be able to balance between desired profits and the customer’s perception of a products value.  Marketers should evaluate and adjust prices continually to accommodate changes in the environment.  Marginal analysis is the method of analyzing the relationship among costs, sales price, and increased sales volume.  Profit maximization is the point at which the additional revenue gained by increasing the price of a product equals the increase in total cost.  Marketers commonly set target return objectives, which are short or long run pricing objectives of achieving a specified return on either sales or investment. 2. Prestige Pricing  Prestige pricing establishes a relatively high price to develop and maintain an image of quality and exclusiveness that appeals to status conscious consumers.  Cost if the primary factor that makes you want to own the product since the high cost makes ownership prohibitive. 3. Meeting Competition Objectives  In many industries, firm’s set prices to match those of established industry price leaders.  Pricing objectives tied directly to meeting prices charged by major competitors de- emphasize the price element of the marketing mix and focus more strongly on nonprice variables. i. Value pricing – a pricing strategy emphasizing benefits delivered from a product in comparison to the price and quality levels of competing offerings.  this strategy works best for relatively low priced goods and services.  The challenge for those who compete on value is to convince customers that low priced brands offer quality comparable to that of a higher priced product.  As a result many alternative and private label brands have emerged which creates more competition in the marketplace in recent years. 4. Volume Objectives  Some economists believe firms will set a min. acceptable profit level and then seek to max. sales in the belief that the increased sales are more important in the long run competitive picture than immediate high profits. As a result, firms will expand sales s long as their total profits don’t drop below the minimum return acceptable to management.  Another volume related pricing objective is the market share objective. This is when the goal is to achieve control of a portion of the market for a firm’s good/service. 1. PIMS studies  Market share objectives may prove critical to the achievement of other organizational objective.  Profit Impact of Market Strategies Project is research that discovered strong positive relationship between a firm’s market share and product quality and its return on investment.  Factors influencing profitability were a firms market share and product quality. The greater the market share of a firm (>40%), the greater return on investment they experienced (32%). Compared to those (<40%) experienced an avg ROI of 24%.  Firms with large shares accumulate greater operating experience and lower overall costs relative to competitors with smaller market shares. 5. Pricing Objective of Not for Profit Organizations.  Profit Maximization i. Even though the definition is not to have profitability as the main goal, there are areas where profit max. is key. For example the min. amount you have to pay for a plate of food at a charitable event.  Cost recovery i. Not for profit organizations attempt to recover only the actual cost of operating the unit.  Market Incentives i. Some not for profits offer a free service to encourage increased usage of the good or service. For example, a bus transit system giving free rides on Canada day so on days when the roads are congested, they can use the service and gain a new customer.  Market Suppression. i. High prices help to accomplish social objectives independent of the cost of providing goods or services. Methods for Determining Price 1. Supply and Demand  Demand refers to a schedule of the amounts of a firm’s product that customers will purchase at different prices during a specified time period.  Supply refers to a schedule of the amounts of a good or service that will be offered for sale at different prices during a specified period. 2. The concept of elasticity in pricing strategy  Elasticity i. Measure if the responsiveness of purchasers and suppliers to a change in price.  Elasticity of demand i. % change in the quantity of a good/service demanded divided by the % change in its price  Elasticity of supply i. Responsiveness of producers to changes in the price of their goods or services. As a general rule, if prices rise so does the supply ii. Elasticity of supply is measured as the ratio of proportionate change in the quantity supplied to the proportionate change in price. High elasticity indicates the supply is sensitive to changes in prices, low elasticity indicates little sensitivity to price changes, and no elasticity means no relationship with price. Also called price elasticity of supply.  Determinants of elasticity i. Availability of substitutes/compliments
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